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The Bank of Nova Scotia and Royal Bank of Canada will begin offering Interac Flash, Canada’s first contactless debit payment feature, on bank cards starting in mid-2011.

Interac Flash will allow consumers to make small-ticket purchases, such as fast food, gasoline or coffee, by waving the new cards in front of an enabled card reader. Since no PIN is required, consumers will face daily spending limits of up to $100 on contactless debit purchases.

It isn’t yet known which merchants will sign up first to accept the new cards.

Contactless debit, which already exists in the United States and many other countries, is a significant milestone in converting Canada into a cashless society. Contactless payments are also considered a precursor to emerging mobile payments technologies – such as paying through a cellphone.

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A boon for both time-pressed consumers and merchants, contactless debit is also expected to shake up competition in Canada’s rapidly growing payments industry.

That’s because Flash will put Interac Association in direct competition with global payment giants Visa and MasterCard for a share of the estimated $90-billion-a-year market for cash transactions under $20.

Contactless payment features are now available on millions of Canadian credit cards for low-value transactions. In particular, card companies are targeting quick-serve restaurants to increase their haul of lucrative transaction fees.

Still, contactless debit represents a mammoth opportunity for Interac since Canadians have demonstrated a particular fondness for using their own money.

In fact, Canadians are among the world’s top debit users, second only to the Swedes, according to the Bank of International Settlements. The domestic debit market was worth a whopping $171 billion last year.

“We are extremely pleased,” Interac president and chief executive officer Mark O’Connell said in a statement. “We’re putting Canada’s first contactless debit solution in the hands of customers.”

The challenge for all players in the small-payments market is to guarantee speed, ease-of-use and security for contactless transactions.

Interac Flash cardholders will be able to choose whether to wave the contactless debit card in front of an enabled card reader or use the more traditional approach of inserting the card in a reader and entering their PIN, Interac said.

The CHIP-embedded cards contain a number of security features, including Interac’s existing zero liability policy for transactions that didn’t involve the cardholder.

In addition to a daily spending limit, consumers will be randomly prompted by the card reader to insert their CHIP and PIN to verify they are the valid cardholders.

Consumer advocates agree that Canadians have been clamouring for contactless debit, particularly since the technology has existed in the United States and Europe for years.

“This will speed up lineups,” said Bruce Cran, president of the Consumers Association of Canada.

“It’s pretty much free of fraud in Europe because it’s too small for the fraudsters to make much money at. I think it’s a very good step and one that’s going to be very good for retailers and merchants.”

TD Merchant Services, one of the five leading payment processors in Canada, will begin offering the Flash option to retailers in early 2011.

Interac said the wholesale fees it will charge for contactless transactions will be based on the same flat-fee model used for CHIP and PIN transactions.

Merchants said they welcome the move. In other countries, such as the United States, contactless debit is subject to higher transaction fees.

Visa and MasterCard also have debit cards in the Canadian marketplace but those cards are only allowed to be used for online shopping or international purchases.

Canadian Imperial Bank of Commerce’s new Visa-branded debit card, for instance, cannot be used for contactless payments in foreign stores.

However, Visa’s payWave contactless technology is designed for both debit and credit transactions. It is used for both types of payments in the United States, United Kingdom, Brazil and various parts of the Asia-Pacific region.

Similarly, many banks offer Debit MasterCard with PayPass in the United States and other countries. Bank of Montreal, which issues a MasterCard Maestro-branded debit card in Canada, does not now offer that contactless debit functionality.

Visa and MasterCard are eventually expected to make huge strides in the emerging mobile payments market using their contactless technologies as launch pads.

In 2008,Visa partnered with RBC and Rogers Wireless in a mobile payments test pilot that used a cellphone to make contactless payments using payWave.

MasterCard, meanwhile, conducted a mobile pilot project with Bell Mobility and Citibank in 2008 using its PayPass technology. Earlier this year, it wrapped up a second trial involving mobile tags with Bank of Montreal and BlackBerry maker Research in Motion.

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